In this week’s Commercial Awareness update, we discuss interest rate rises, Facebook’s ads revenue, Martin Sorrell stepping down from WPP, oil price highs, Premier League profitability and whether young people will be able to buy a house.
When will interest rates rise?
Economic forecasting group EY Item Club, predicts two interest rates rises this year and two next year, pointing towards a more positive global economic outlook. Despite Mark Carney, governor of the Bank of England, suggesting Brexit and sluggish economic growth could prevent these rises, research suggests that consumer confidence is in fact increasing. It follows that if confidence in the economy is higher, there’s less likely to be a negative backlash against a rates rise. However, markets fell last week when Carney suggested a rise in May isn’t a certainty and any rises will be more gradual than many expected - the markets had already priced in the rise as it looked like a certainty for May only a few weeks ago, hence the dip now.
There are other factors the Bank of England will consider when debating raising interest rates, with inflation being one of them. In March, inflation unexpectedly fell again to 2.5% - therefore, it’s not significantly higher than the 2% the Bank of England targets for inflation. Interest rate increases are often used as a mechanism to lower inflation. If there are higher interest rates, consumers tend to save more, spend less and it becomes more expensive to borrow money, which decreases disposable income and therefore demand in goods. With lower demand in goods, prices rise at a slower rate (i.e. lower inflation). Therefore, with inflation lowering without a rates rise, it could be argued there is less of a need for the Bank of England to act.
With the prospect of a wage rise looming, demand for the pound rose and reached a post-Brexit Referendum high of $1.43. This latest jump makes the pound the best performing currency this year amongst the G10 countries.
Questions to ask yourself… Should the Bank of England raise interest rates? What other factors should the Bank of England be thinking about?
Companies to watch
Facebook founder Mark Zuckerberg faced 10 hours of grilling questions in Congress this month in the wake of a data scandal involving the social media giant and Cambridge Analytica. Speculators believe he performed well during the questioning by 100 members of Congress, but are there more challenges ahead?
Despite the scandal there doesn’t appear to be a decline in advertising revenue on the platform. Average spending was up 43% in the weeks after the scandal compared to the same period last year, as brands clearly still like the platform. However, this is very much the short term view of the impact and falling ad revenue may not yet be fully understood - analysis suggests that in a worst case scenario $2 billion of ads revenue could be at risk. Plus there could be further problems ahead, especially with shareholder confidence. Facebook’s share price dropped over 8% in the last three months, despite Zuckerberg’s performance in Congress giving it a 4.5% boost. There could also be wider costs surrounding increasing regulation in the digital space, which could limit what Facebook can offer its customers in the targeted advertising space.
Last week, ads king Martin Sorrell stepped down as CEO of advertising giant WPP after 33 years in charge of the organisation. On the first trading day after his announcement the company had £1 billion wiped off its value, as the share price dropped 6.5%. The main worry amongst shareholders was that without the long standing chief, WPP could be broken up into smaller parts. Sorrell stepped down amid claims of personal misconduct and due to the terms of his contract won’t receive a payout or pension. However, he owns about 2% of the company and could make up to £20 million in share bonuses in the next five years. Sorrell was one of the UK’s highest paid CEO and in 2015 he pocketed £70 million through a share scheme. He now faces a backlash from WPP shareholders for the terms of his departure, while he braces for investigations into alleged financial misconduct.
Questions to ask yourself… Should Facebook be regulated more? What are the disadvantages for shareholders if WPP is broken up?
Mortgages and House Prices
Mortgage lenders are decreasing the rates for customers on what many deemed high risk mortgages - including those where 90% of the value of the property is lent. Due to huge competition and consumer reluctance to buy, mortgage lenders have dropped their rates to increase their revenues. This move happens despite the Bank of England increasing interest rates to 0.5% back in November, which should give lenders the opportunity to increase returns on their loans. Lower mortgage costs are good news for first-time buyers, but could cause a problem in the future if rates start rising rapidly and customers start defaulting on their mortgages.
In other property news, a survey revealed that one-third of millennials will never own a property but will instead be renting. This is distressing news for some, especially those looking to buy in or around London. House prices in the capital are some of the most expensive in the world, but latest figures suggest they are falling at their fastest rate since the 2008/9 financial crisis. Mortgage lender Halifax, said that house prices in the capital were down 3.2% between January and March. Experts predict this trend could continue.
Questions to ask yourself… Are lower house prices necessarily a bad thing for London? Should mortgage lenders have more regulation?
Oil prices rise to 3-year high
Fears about oil supply has driven the price of Brent Crude Oil to a 3-year high of over $70 per barrel. The potential for a war in Syria and Trump’s protectionist policies have caused worry about the supply, which many believe has contributed to the price hike. Plus, the biggest export of crude oil, Saudi Arabia is rumoured to want oil prices at $100 per barrel, aiming to overcome financial difficulties in the country and make the government owned oil company, Saudi Aramco more appealing to investors ahead of what could be the biggest IPO in history. However, experts worry what this could do for the global economy, potentially stalling any recovery. Donald Trump last week blasted OPEC (Organisation of the Petroleum Exporting Countries) for artificially keeping prices high by controlling supply.
Question to ask yourself… Who loses out if oil prices rise to over $100 per barrel?
And finally… Premier League revenue record
Professional services firm Deloitte revealed a record £4.5 billion of revenues and a pre-tax profit of £500 million collectively amongst the Premier League football clubs in 2016/17. This is a big boost for the top football clubs in England who lost money in 2015/16 largely due to rising wage bills. Last year, Financial Fair Play rules meant clubs kept wage inflation to a lower 9% - which was still £2.5 billion extra - but wages rises were less than the 25% increase in revenues clubs enjoyed last year. The lucrative 3-year TV deal with Sky and BT Sport worth £5.1 billion has significantly contributed to this rise in revenue.